Dimitrios V.

Siskos

Project Finance and Surrounding Factors

To: Dr. Igor Gvozdanovic

November 6, 2014

This paper is submitted in partial fulfillment of the requirements for the degree of Doctorate of Finance

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Contents

Contents.................

List of tables...... 3

Abstract..............

Introduction ..............

The roles of project financing in an economy.

Project Finance Initiative (PFI)...

The four major parties of a typical PFI...

References....................... 9

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SMC Working Papers

List of Tables
Number

Page

Figure 1: PPP in European Union ......

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Dimitrios V. Siskos

SMC Working Papers

Project Finance and Surrounding Factors

Siskos V. Dimitrios
Swiss Management Center (SMC) University
November 6, 2014

Abstract
Project finance schemes has over the years yielded positive results in constructing long-term infrastructure
and industrial projects without necessarily having sufficient funds (Esty, 2004). On the other hand, the
Private Finance Initiative (PFI) is a most recent development in the UK in which private sector organizations,
design, build, finance and operates assets to deliver a service to public sector clients (Akintoye, et al., 1998).
However, the real success of such projects depends on the degree to which risk is genuinely transferred from
the public to the private sector and optimally shared (Corner, 2006). This study reviews the immense
contribution of project finance schemes and PFIs in constructing numerous public projects, as well as it also
describes the four major parties of a typical PFI transaction.

Keywords: Project, Project finance schemes, Private Finance Initiative (PFI), Project Risk, PFI transaction.

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Introduction
By the beginning of the 1980s, project finance became a clearly identifiable profitable subsector of the
banking worlds revenue streams (Fight, 2006). Indeed, the use of project finance has grown dramatically
over the years from $ 12.5 billion (bn) in 1991 to 113.4 bn in 20051 (Kleimeier and Versteeg, 2009). As
expected, the role played by project finance schemes in most economies is very significant to their
development especially the emerging economies (Esty, 2004). This research further seeks to analyze and
examine the major parties to a typical project finance initiative.

The roles of project financing in an economy

Project finance schemes has over the years yielded positive results in constructing long-term
infrastructure and industrial projects without necessarily having sufficient funds (Esty, 2004). As such, the
financing of projects has been successfully undertaken worldwide for more than 15 years now. This
phenomenon has enjoyed great popularity, initially in the US and Asia before spreading to Europe. Countries
from all over the world needed money to finance their projects. For example, Build-operate-transfer (BOT)
has been one of the preferred models of publicprivate partnership (PPP) for attracting private capital in the
Indian highway sector. Such a unique feature of project finance schemes had great impact on most African
and emerging economies (Thompson, 2010). Through BOT projects, a government reallocates the risks and
rewards in the development of large infrastructure projects to the private sector, whereas the main key aspect
to the successful implementation of the BOT concept in any country is the raising of finance by project
sponsors (Bakatjan, et al., 2003).
As such, BOT outsourcing contracts seem to be an interesting contractual novelty that combines the
advantages of outsourced and captive off shoring operations (Jensen, 2013). For example, in 2010 alone,
Russia, Brazil, China and India have signed over 200 non-recourse finance deals worth over $130 billion
1

As reported by LPC Dealscan. The dollar amounts are nominal and reflect the debt proportion in the financing of the projects.

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(Mensah, 2013). Another example is the results of a research made by Verdina and Verdina (2012), who
analyzed the projects co-financed by the European Union (EU) funds and implemented by companies in
Latvia. Particularly, they showed a list of comprised 2303 projects that had been executed until 2012. In
whole, many regions in the continent as Africa, Europe, Asia, Pacific and the Middle East has benefited
tremendously from project finance.
The table below shows the which countries, throughout European Union, had already established
projects financed through project finance schemes as at the end of the period 2010.

Figure 2: PPP in European Union2

Source (Elkhouly, 2005)

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Project Finance Initiative (PFI)

Unlike other forms of co-operation between the public and the private sector, PFI involves the
investment of private capital in projects, which provide services to the public (Akintoye, et al., 2001). Total
project-financed investment has grown from less than $10 billion per year in the late 1980s to almost S221
billion per year in 2001 (Esty, 2003).
At the late 90s in the UK, one of the countries that have capitalized on the immense benefit of PFI, it is
usual for PFI projects to be funded by equity investment (Fox and Tott, 1999). In UK, the initiative grew
from the idea that private contractors should not only build infrastructure but also be responsible for
maintaining and servicing it (Fight, 20006). Under the Project Finance Initiative (PFI), all project
stakeholders take a long-term perspective on the project, thus permitting the various contractors and investors
in the project to work together with a common financial interest in creating a whole-of-life, cost-effective
project that achieves full client satisfaction and performance to requirements (Akbiyikli, et al., 2006).
Generally, the real success of PFI projects depends on the degree to which risk is genuinely transferred
from the public to the private sector and optimally shared (Corner, 2006). Indeed, the main benefit of PFI
contracts is that they can deliver better value for money than traditional methods of procurement since its
risks are best able to handle them.

The four major parties of a typical PFI

The core parties to a typical PFI transaction are treasury, government agencies, Private Finance Panel
and 4Ps, government agencies, and the funders (Fight, 2006). The treasury helps to reactivate the lending
market for private finance projects. The government agencies are the public departments which engage the
private sector to design, build, finance and operate the project (Yescombe, 2002), while they derive their
approval from the central government (Fight, 2006). The project company reflects a consortium which
special purpose is to accomplish the project (Parker, 2012). The funders on the other hand are the financial

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institutions such as banks and other credit unions that provide funds towards the development of the project.
Last, a Private Finance Panel (PFP) is a quasi-governmental body funded by the treasury (Fight, 2006).

Conclusions
The PFI and the project finance schemes represent a cultural change in the way companies seek ways
to finance projects for both the developed and the emerging countries. However, to be successful it requires
an approach which involves: identifying the right projects, scoping them properly, ensuring that they are
properly structured prior to completion, and securing optimum risk allocation between the public and private
sectors through competitive process that achieves the lowest possible and realistic price to the public sector'
(Hogg, 1996). Notwithstanding these requirements, project finance schemes and PFI still provide a value for
money solution for funding projects in most emerging and developed economies globally.

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References
Akbiyikli, R., Eaton, D. and Turner, A. (2006) "Project Finance and the Private Finance Initiative (PFI)",
Journal of Structured Finance, 12(2), pp. 67-75.
Akintoye, A., Taylor, C. and Fitzgerald, E. (1998). Risk analysis and management of Private Finance
Initiative projects. Engineering Construction and Architectural Management,5(1), 921.
Akintoye, A., Beck, M., Hardcastle, C., Chinyio, E. and Asenova, D. (2001). Framework for Risk
Assessment and Management of Private Finance Initiative Projects. Glasgow: Glasgow Caledonian
University, ISBN 1 903664 28 5
Bakatjan, S., Arikan, M., and Tiong, R. L. K. (2003). "Optimal Capital Structure Model for BOT Power
Projects in Turkey." ASCE, J. Constr. Engrg. and Mgmt., 129(1), 89-97.
Corner, D. (2006). The United Kingdom Private Finance Initiative: the challenge of allocating risk, OECD
Journal on Budgeting, 5(3), pp. 3755.
Esty, B., (2003). Why Study Large Projects? Harvard Business School. Case #203-031.
Fight, A. (2006). Introduction to Project Finance. Essential Capital Markets. Elsvier 1st Edition.
Fox, J., and Tott, N. (1999). The PFI Handbook. Bristol; Herbert Smitli-Jordan Publishing Limited.
Hogg, D. (1996). PFI - Where to now? Private Finance Initiative Journal, 1(5), 10-11.
Jensen P. D., (2013), Build-operate-transfer Outsourcing Contracts in Services Boon or Bane to Emerging
Market Vendor Firms?, Journal of International Management, 19, p. 220-231
Kleimeier, S. and Versteeg, R. (2009): Project Finance as a Driver of Economic Growth in Low-Income
Countries, working paper, METEOR, RM/09/011
Mensah, J. (2013), Role of Project Finance and PFIS in Economies. Available at SSRN:
http://ssrn.com/abstract=2258834 or http://dx.doi.org/10.2139/ssrn.2258834
Parker, D. (2012).The Official History of Privatization 2, Popular Capitalism 19871997, London: Routledge.

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10

Thompson K. N, (2010). Servant-leadership: an effective model for project management. Dissertation

Abstracts International, 66 86.
Verdina G., Verdina A., (2012), Assessment and problems of projects implemented by companies and co
financed by the European union funds in Latvia ECONOMICS AND MANAGEMENT:17(1)
Yescombe, E. R. (2002). Principles of Project Finance (San Diego, California, USA, Academic Press.

November 6, 2014

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Dimitrios V. Siskos